What is a mortgage?
A mortgage is a loan from a bank or building society that allows you to buy property (a home or commercial property). This is a secured loan, which means your property is used as collateral and is at risk or repossession by the lender if repayments are consistently missed. The mortgage amount borrowed has interest applied to it (either a fixed amount or variable, depending on the Bank of England base interest rate) which is incorporated into the repayment costs.
When taking out a mortgage, you typically put down a deposit (usually a minimum of 10% of the total purchase price). The required mortgage amount is:
Total purchase price less the deposit value
The Loan-to-Value is the percentage of the total purchase price that the mortgage amount covers.
For example: If the total purchase price is £100,000 and a £10,000 deposit is put down, the remaining £90,000 requires a mortgage. So, the loan-to-value is 90%.
Types of mortgage
There are many types of mortgage available, depending on your financial situation. We explain some of them, and the circumstances they are for, below:
Repayment mortgage |
A mortgage where you repay an amount of the borrowed total each month. The intention is you will eventually pay back the full amount and own your property outright. |
Interest-only mortgage |
The monthly payments on this type of mortgage only pay off the accrued interest, not the original borrowed amount. |
Buy to let mortgage |
These mortgages are specifically for property that will be rented out to someone – it is not to be used for a property you intend on residing in. |
Commercial mortgage |
A specific type of mortgage used for purchasing commercial properties. |
Guarantor mortgage |
A guarantor is someone willing to step in and make repayments if you are unable to. They will be named on the mortgage. Having a guarantor may make a mortgage attainable for some who would otherwise be unable to get one. |
Second mortgage |
If you are purchasing a property that is to be a second home or holiday property. |
Costs associated with mortgage
The main costs, aside from the amount borrowed, are the mortgage fees and the interest that is applied to your mortgage amount. Fees can include those associated with taking out a specific mortgage product and fees from a mortgage broker.
Interest on a mortgage may be fixed, variable or tracker:
- fixed interest rate means that the rate will be fixed for the duration of the mortgage deal (usually 2 years or 5 years). It does not shift up or down depending on the Bank of England interest rate. However, if the base rate increases, the fixed interest rate on new mortgage fixed rate deals may be higher than it was previously for the same product.
- variable interest rate is also not directly linked to the base rate, though it may follow it roughly. With a variable rate your lender can increase or decrease your interest rate on any given month.
- tracker mortgage tracks along with the interest base rate, plus a few percentage points. For example it may track at 3% above the Bank of England interest base rate. In this example, if the interest rate was 1.75%, your tracker mortgage interest rate would be 4.75%. As the interest base rate increases or decreases, so will your mortgage interest rate, in line with this.
How can we help?
Whether you’re looking to take out your first mortgage, a new mortgage on a second property or your existing mortgage deal is coming to an end, contact us. We’ll assess your financial situation and requirements, and identify the best options for you, from several lenders.
